Hiten Shah (@hnshah) of Kissmetrics had some great suggestions in relation to an audience question on pricing to his Lean Startup Circle talk (given with Cindy Alvarez @cindyalvarez, and John Butler) last week.

He described three useful strategies to test pricing:

1. Set a relatively high price and then send out various discount codes: e.g. 10% off, 20% off, 30% off.  Analyze which discounted price point brings you the most value on a cost vs volume basis.
2. Split-test landing pages with different prices
3. Test a price increase, and if a user buys only charge them the “normal” price. This is useful to prevent any bad feeling that option 2 might cause. (See Amazon’s lessons on this one)

If you’re in the Bay Area, join the group!  There was some great advice from Cindy and John in this session, including some great points on what types of questions to ask in a Customer Development Process. Watch the full video, courtesy of David Binetti (@dbinetti) -

Jiujitsu clubs have a motto – “Leave your ego at the door”. When you walk onto the mat, you’re going to meet people of different sizes, speeds, and skill levels who in one way or another are going to kick your ass. You approach each fight differently, and with a large amount of humility or else you’re going to end up frustrated at best, and just plain broken at worst. The goal is to learn what works in each different situation and ignore what doesn’t. In Jiujitsu, if you hold on to an idea too long you get choked out, or get your arm snapped.

Business and Ego

In a company, people have ego attachment to different areas of the business. You might love the grand vision, the content team might love the type of data they’re creating, marketing might be really proud of their positioning strategy, and the development team is smitten with the fantastic technical solution they’ve created. None of this matters if there’s no customer who also loves it and is willing to pay for it. On the road to developing a successful business, every part of the business can do what they’re told and the system as a whole will still be a complete failure.

Lean Philosophy

The Lean Startup philosophy is designed to minimize this ego involvement. You validate with the customer that you understand their problem. You validate that they think your solution is the answer. You measure that they’re actually using it the way they said they would. You constantly test and tweak, and abandon that which doesn’t work even if you’ve poured your heart into it.  Gradually from the shattered remains of your ego, you have something that people love. You just have to learn to let go.

Henry Ford famously said:

If I’d listened to what my customers wanted, I’d have given them a faster horse.

I’ve heard this reasoning applied as a justification for ignoring user validation for product changes and features. While there is a definite need for visionary ideas to avoid the “Me 2.0!” mindset of blindly emulating other ideas, at some point a customer needs to actually pay for the product. Henry Ford had some amount of ‘modest’ commercial success with his cars, so what’s the problem?

Customer Development Process

Customer Development might have helped him out here. Instead of asking what customers want he might have spent his time figuring out what problems they had: the inconvenience of feeding, stabling, and re-shoeing their horses. Weariness of the bone-jarring discomfort of long journeys on horseback. The desire to get to their destination that little bit faster.

You start with a fuzzy problem set that may or may not really bother the user, and gradually smooth out the assumptions and inconsistencies in actual conversation with your potential customers until the problem is more accurately defined. Once this is done, you can look at how to apply technologies or processes to the challenge and then return to the customer again to validate that the solution you’ve designed solves the issue, and is important enough for them to actually pay for it. It may be the easiest it’s ever been to develop online solutions.

Vision

Did Ford need to apply Customer Development, or was the writing already on the wall that horses were on their way out? Recognizing an opportunity is a completely separate skill. Vision is absolutely necessary to access new markets, but visions are sometimes hallucinations. Running headfirst into a solution before you can validate that the solution fixes a real problem that people are prepared to pay for is wasted energy at best, and self-gratification at worst.

Ben Horowitz has a great contrarian article about ‘Fat’ startups which has caused immediate reaction around twitter and the Lean Startup community. Unfortunately, his article has very little to do with the Lean Startup concept and a lot to do with reactionary CEOs flipping out about the infamous Sequoia presentation. It also has a little to do with how choosing a name is important. For the record Ben Horowitz is right, but let’s backtrack a little bit.

What is the ‘Lean’ in ‘Lean Startups’

The ‘Lean’ in ‘Lean Startups’ comes from ‘Lean Thinking‘ as used in the streamlined production process pioneered by Toyota. This process is designed to banish waste in a production process. In the specific context of the Lean Startup process, it is to ensure that if you’re going to add a feature to your product there had better be a customer there to love it.

What the ‘Lean’ in ‘Lean Startups’ is Not

‘Lean’ in this context has nothing to do with spending less money. It is about effectiveness. It is about preventing your developers writing code that will never be used. It is about making sure that when you only have only one hundred hours to spend writing code, that as many of those hundred hours as possible are spent creating features that customers actually want. Fundamentally, it is about increasing the amount of validated learning you can get out of your process. To do this might involve increasing the amount of money you spend. It may require spending more money on people who are continually testing that your hypotheses are correct on actual users.

What’s the difference?

In Ben’s article we see CEOs reacting to the Sequoia memo, which makes a lot of sense. Around the startup community it was like a meteor had hit. Guy Kawasaki said that if you weren’t paying attention to this memo then you were clueless. Any available investment money dried up overnight. What Horowitz sees in these investment pitches is CEOs trying to display their cluefulness to potential investors by preaching the ‘Low Cost’ mantra. But he’s claiming that sometimes you need to spend big. Is there a disconnect?

Where the ‘Lean Startup’ becomes a ‘Fat Startup’

The critical mission of a Lean Startup (from Eric Ries’s concept) is to get to Product-Market fit.  Horowitz’s VC partner Marc Andreessen describes it as the only thing that matters. This is where the two stories link up. It’s the next stage in the same process – when you have product-market fit and there is a scalable and repeatable sales model you crank up the volume! All that validated learning turns into a method where a smaller amount of sales effort turns into a much larger amount of money. You spend to get there, and then you spend a whole lot more.

Facebook

Pumping too much money into a small start-up is unhealthy for both the company and the investor. On the other hand, Facebook has raised several hundred million dollars and is on track to produce fantastic returns for all of its investors. So what’s a start-up to do?

The difference here is one of timing. Facebook had phenomenal growth – users on college campuses all across the country were signing up at an amazing rate. That’s a pretty good indicator of product-market fit, and a different ballgame entirely. At this point the organization needs to scale to meet the demands of the market, and to do that you need money. A lot of it.

Hypergrowth Markets

Both Opsware and Facebook had product-market fit and were racing to gain a dominant position in a market where no clear leader had emerged. The decision to shoot for break-even revenue vs land-grab for market share is a strategic play at this stage. They both chose the process that Geoffrey Moore describes for capitalizing on hyper-growth markets in “Inside the Tornado“, which is a place that most startups can only dream of getting to.

Final Lesson?

Sorry Eric, “Lean Startups” is a terrible name for this movement. There’s been too much confusion with people translating “Lean” into “Spend zero money”.

A recent hacker news article about technology advocacy got me thinking about the Lean Startup philosophy, particularly the tenet of “platforms enabled by open source and free software“.  To summarize briefly, Lean startups are built upon:

1. Agile development practices
2. Customer-centric rapid iteration (Customer Development)
3. The use of platforms enabled by open source and free software.

This last concept is something I want to dig into a little bit more. Is the success of a lean startup really dependent on all three of these elements?

Relevance of the Open Technology Stack

In what ways does an open or free software platform directly benefit a lean startup’s success? Let’s pretend that we clone a startup model; we have two startups each consisting of identical teams. Each of the teams has verified that a problem exists for a set of customers that have money and are willing to spend it to solve their problem. Each startup consists of:

1. Gifted technology implementers
2. An equally gifted team of customer development experts

We send them out to try to further validate any assumption about the customer problem, and they then set set out to build and rapidly iterate upon a technology solution that satisfies the minimum viable product.

Here’s the kicker – Team one use open source technologies, Team two use a proprietary technology stack. Does success hinge upon the use of technology? Can an MVP delivered in a “locked-in” technology stack be as effective at solving the customer’s problem as an open stack?  I would argue that given the same gifted technology team it will not have any negative effect on a startup and in some (albeit limited) cases, a locked-in technology stack may actually be of benefit to a startup. Here’s that diagram redefined:

Lean Solutions

Here’s the takeaway point – Technology is just a tool to solve some sort of problem. For a lean startup you can use any number of wonderful toys to implement your solution – the point is that you should spend your time and money as effectively as possible. Lean startups are low burn companies by design (slide #47).

Spending money effectively is the key point! Effective spending = a longer runway = more iterations = more learning = a higher chance of success. Paul Graham is very outspoken on the topic of more “enterprise” technology solutions as a reflection of the intelligence and ability of a startup team. He makes very salient points, though I can’t agree with all of them. However, as mentioned previously there are instances where if you can ensure that a specific technology allows you to learn as effectively for the same cost, then a proprietary technology may actually be a competitive advantage (or at least, it won’t be a disadvantage). One example is Enterprise sales.

Lean Startups and the Enterprise

Companies who have an employee base of tens of thousands tend to have been expertly sold on Enterprise solutions from companies like Oracle and SAP. It can provide safety and comfort for the CIO of an enterprise company to purchase from an established vendor such as this – the old adage of “Nobody ever got fired for buying IBM”.  The end user of your product may only be one of several deciding parties, and could have relatively little say in the final decision for a potential sale. In many cases a sale hinges upon buy-in from a technology manager whose criteria is “How much of a headache will this product cause me if I need to to roll it out to 10,000 users?”.  Choosing a technology stack that they already rely on may push a decision in your favor.

Technology Choice and Customer Development

As a final point, I believe that technology choice is a critical output of the customer development process. When defining the initial problem set for an enterprise customer, a startup needs to determine what existing platforms the economic buyer of a product has approved in the past and ensure at a minimum that technology choice isn’t a disadvantage. “Crossing the chasm” and gaining adoption by the pragmatist / conservative mainstream will in part depend on how well your technology choice integrates with the customers existing platforms. New technologies can make some customers very nervous.

For consumer internet startups, technology choice is less of an issue as long as it can solve the problem effectively – focus on lean learning from actual customers over technology advocacy.

Edit: It’s been pointed out to me that Eric Ries describes the “open source technology” point more definitively as ‘Technology Commoditization” in a later explanation, so it seems we’re on the same page. I think actually referring to “Open source technologies” has some benefits – it further facilitates the spread of the “lean startup” philosophy itself among technology enthusiasts.

]]> http://www.apeofsteel.com/1084/lean-startups-and-technology-choice/feed 0 http://www.apeofsteel.com/976/game-mechanics-stickiness-and-customer-development http://www.apeofsteel.com/976/game-mechanics-stickiness-and-customer-development#comments Sun, 24 Jan 2010 21:41:28 +0000 Dave http://www.apeofsteel.com/?p=976

Robert Scoble has an interesting post about Incentivizing social behaviour in your app. Coincidentally, during the week I was listening to Amy-Jo Kim’s excellent Mixergy interview about Game Mechanics and wondering how the concepts could be applied in more ’serious’ software. (Edit: Alan O’Rourke also directed me to this excellent presentation on the subject. Another great presentation by Amy-Jo Kim here.).

When I was still at college I spent an unhealthy amount of time playing MUD. This is like the text-driven grandfather of World of Warcraft or similar online games. Looking back, it looks like an antiquated relic – no graphics, grindingly slow, and you’d be randomly disconnected all the time; but it was as addictive as crack cocaine. Playing MUD became an obsession. My friends and I would try to cram in 10 minutes playing before lectures or exams, and often hang around the computer labs until we were kicked out.

Amy-Jo Kim nicely summarizes a lot of the essentials of Game Mechanics in her Mixergy interview so  instead of repeating them I’d advise you to go and listen to it. One fundamental concept she mentions several times is to create “Braggable Moments” for your users. We see this happening organically on a service like Twitter, where the ‘re-tweet’ evolved as users wanted to share a quality tweet from another user. Being re-tweeted by a famous or popular user is the very essence of a Braggable Moment.

Scoble’s blog post defines the sort of social mechanisms he sees for software such as FourSquare, but I see these applications as being designed specifically as games. I don’t see them solving a particularly pressing pain point for a customer that can’t already be solved in a more direct way – E.g. “Where are my friends? Well, I guess I’ll ring them and ask.“

Defining a “Braggable Moment”

I’m going to create a loose definition of a ‘Braggable Moment’ as a shared action which elevates an individual user in status among their peers. Akin to the “retweet” example from Twitter, we have the “like” button on Facebook. Someone “liking” your status update is something which adds kudos to the original poster’s content, elevating the user’s status. At it’s most basic it’s pandering to the user’s ego, but if used correctly it can be used to encourage the types of behavior you need for your software to be successful.

Implementing Game Mechanics in ‘Serious’ Software

So how can similar addictive elements be utilized to make more serious software ’sticky’? Ebay has a leaderboard and a ‘level’ system for it’s power sellers. Amazon has a ‘top reviewers’ leaderboard for people who have contributed the most reviews. In a very simple example which Max Klein describes humorously as Pavlovian conditioning, the bell sound added to lead conversion software was a very prominent braggable moment – When a lead converted into a sale, the salesperson’s software made an audible sound to tell his peers that he had sold something. Furthermore, these sorts of features drive the users competitive nature – encouraging them to use the software more.

Implementation Ideas

1. Leaderboards - probably the most accessible method for enterprise software – Create a top ten list of the most active users (rewarding only actions which add value to the system E.g. Adding useful comments to a data service, Most Sales).
2. Sharing of added content - The re-tweet concept. If someone shares a valuable information added by a user, let the user and their peers know somehow that their information was considered valuable. Display a list of their items which have been shared in their profile or create badges or levels for being shared a certain number of times.
3. Elevate Individual items of merit – Prominently display a “best comment of the week” or similar added content, solved problem, or whatever other purpose the software is designed for.

Game Mechanics and Customer Development

The first thought after I read Scoble’s blog post was to explore the idea of baking these viral concepts into software directly from the initial Customer Development process by identifying not just the pain points but the types of things that pander to the user’s ego. My feeling is that unless you’re either developing a social application, designing a game, or innovating in a market where the problem space is well understood you’re probably trying to paint the boat before the hull is finished – aim for the absolute minimum deliverable and iterate. The whole idea probably reflects that I’ve been reading too many articles on Customer Development recently.

With that said, If you’re trying to innovate in an existing market where the problem space is well understood, I’d hold up something like StackOverflow (which uses badges, levels etc) as a great example of how to increase ’stickiness’ and reward desirable behavior with braggable moments. Question and Answer forums have been around since the dawn of the consumer internet and the problems and opportunities in this area are well understood. Adding game mechanics to this area has increased usage, attracted more knowledgeable participants, and greatly improved the quality of the content.

The types of sites I read have slowly migrated away from pure technical sites talking about monkeying around with with code towards sites discussing business, customer development, marketing, and general startup concepts. Here’s a list of my favorite authors, blogs, podcasts, and forums dealing with these topics. Who else should I be listening to? Let me know in the comments.

Update: All the best Lean Startup and Customer Development resources in one place: http://www.leanstartupfeed.com/

Customer Development and Lean Startups

Steve Blank

Steve Blank is a successful startup veteran and MBA lecturer in the Haas School of business at UC Berkeley. He took the lessons he learned in successfully marketing his startups to develop the concept of Customer Development in the must read book “The Four Steps to the Epiphany“. Seriously, if you’re working in a startup – you need to read this book.

http://steveblank.com/

Eric Ries

Eric Ries developed the Lean Startup methodology by combining concepts from the Toyota Production System (Lean Manufacturing), Agile Software Development, the OODA loop, and Steve Blank’s Customer Development model. The combination of these ideas results in a low-cost startup that is critically focused on rapidly producing a product which satisfies customer needs. There are some fantastic concepts in his writing which will inspire (Minimum Viable Product) and possibly scare the crap out of you (Continuous deployment for example).

http://www.startuplessonslearned.com/

Dave McClure

Dave McClure is a successful entrepreneur and angel investor. Dave mainly writes about using startup metrics to drive success. His “Startup Metrics for Pirates” presentation describes essential metrics any web application needs to measure to turn first-time users into obsessed fans. His refreshingly informal writing style pulls no punches, and his violent use of text color will make your eyes bleed. (The reason I have pictures next to each of these authors is mainly due to this loud advice. He’s right.).

http://500hats.typepad.com/

Individual Article of Merit:

This epic saga by Recess Mobile tries to map out the entire landscape of Customer Development and Lean Startups. I can only imagine how long it took them to write this one.

Startup Marketing

Sean Ellis

Sean is a seasoned startup marketer having led several companies through to IPO. He writes about Customer Development, PR, and startup marketing.  As a quick taster, check out his Venture Hacks interviews on bringing a product to market – Part One on what to do before Product/Market Fit & Part Two on what to do after Product/Market fit.

http://startup-marketing.com/

Brant Cooper

Brant is another very experienced startup marketer who is developing a series of tools and models based around the Customer Development methodology. He recently conducted a survey into the current Customer Development landscape which can be found here: Customer Development Survey. Most recently he put together a simple model which ties Customer Development, the standard sales funnel, and Dave McClure’s AARRR metrics into one cohesive whole [Available Here]. Highly recommended.

Together with Patrick Vlaskovits (@vlaskovits), he wrote the excellent “Entrepreneur’s Guide to Customer Development“, which I reviewed and would recommend highly.

http://market-by-numbers.com/

Venture Capital and Entrepreneurship

Fred Wilson

Fred is a VC at Union Square Ventures based in New York, which funds companies such as FourSquare, Boxee, and Etsy. His blog covers a wide variety of topics in the area of entrepreneurship and business strategy, and also a little bit of venture capital concepts. He provides a very interesting critical eye on technology industry news.

http://www.avc.com/

Mark Suster

Mark is a successful British entrepreneur who has “gone over to the dark side” to become a VC. He covers the gamut of entrepreneurial topics from raising startup capital, marketing, right down to the definition of  “Entrepreneurial DNA“. His fantastic interview on Mixergy was quite probably the most inspiring thing I listened to last year.

http://www.bothsidesofthetable.com/

Nivi & Naval (Venture Hacks)

Nivi and Naval have founded successful companies, and invested heavily in startups like twitter. They  cover a full range of startup essentials from securing funding from angel investors, how to choose company advisors, the psychology of a board of directors, and a fantastic selection of case studies on all of the above and more.

http://venturehacks.com/

Business Model Hacking

Alexander Osterwalder

Alexander’s blog centers around the Business Model Canvas methodology which involves analyzing business models, pulling them apart into their constituent parts and then reassembling them in interesting ways. Lego for business if you will. He uses an interesting tool sheet to aid this, which I think meshes perfectly into the lean startup concept of ‘pivoting’.

http://www.businessmodelalchemist.com/

Podcasts, Interviews, and Videos

Andrew Warner – Mixergy

Andrew Warner co-founded an internet business with his brother which went on to generate over thirty million dollars a year in sales. With Mixergy, Andrew has conducted some of the most inspiring and amazing interviews with entrepreneurs you’re likely to find. He conducts frank and probing interviews that dig deep into the mindset of his interviewees – people who have either taken their business to dizzying heights, or failed spectacularly trying.  As well as my personal favourite interview with Mark Suster listed above, you should check out this interview with Ben Huh of “Failblog”, or this amusing interview with Neil Patel of KISSMetrics. This is quite simply an amazing resource.

http://www.mixergy.com

Jason Calacanis – This Week in STartups

Jason co-founded weblogs Inc which grew to be a huge network of niche content sites, and was eventually acquired by AOL for a giant bag of money. TWiST interviews a wide range of guests in the technology sphere, and intermittent shows where listeners can ask Jason for advice. Very entertaining and informative.

http://thisweekinstartups.com/

Bob Walsh -  Startup success podcast

Bob specializes in news and advice aimed at MicroISVs at his blog 47 Hats. As opposed to the more general entrepreneurship podcasts listed above, the Startup Success Podcast digs into the more specialized issues faced by independant software vendors.

http://startuppodcast.wordpress.com/

Forums

Lean Startups Circle

A Google group centered around advice for entrepreneurs running lean startups.

http://groups.google.com/group/lean-startup-circle

Business of Software Forum

Joel Spolsky’s forum covering a range of issues faced by developers trying to market software.

http://discuss.joelonsoftware.com/?biz

Hacker News

Everything under the sun relating to technology and entrepreneurship. User driven article voting, hosted by Paul Graham’s startup incubator Y Combinator.

http://news.ycombinator.com/